At every moment in the market, there are three types of traders: the buyers, the sellers, and the undecided. Buyers obviously want to pay as little as possible, while sellers want to sell for the highest price possible. This conflict manifests itself in bid-ask spreads (Chapter 2). “Ask” or “offer” is what a seller asks as a sale price for their stock. “Bid” is what a buyer is willing to pay for that position. Actual prices of transactions are the result of the actions of the traders at a particular point in time: buyers, sellers, and the undecided.
Buyers (bulls) and sellers (bears) are under pressure by undecided traders waiting in the background, who could suddenly appear and make the deals the others are considering. If buyers wait too long to decide on a transaction, someone else could beat them to it and drive up the price. Sellers who wait too long for a higher price might be thwarted by other traders who sell at lower asks and drive down the price. The presence of undecided traders puts pressure on buyers and sellers to deal with each other.
Buyers are buying because they expect that prices will go up. Buying by bulls pushes the market up, or as I like to phrase it, “Buyers are in control.” I call them “aggressive buyers”. The result is that buyers are willing to pay higher and higher prices and to bid on top of each other. They realize that they will end up paying higher prices if they don’t act now. Undecided traders accelerate price increases by creating a feeling of urgency among buyers, who then buy quickly and cause prices to go higher.
Sellers are selling because they expect that prices will go down. Selling by bears pushes the price down, or as I like to express it, “Sellers are in control.” I call them “aggressive sellers”. The result is that sellers are willing to accept lower and lower prices. They are afraid that they may not be able to sell any higher and may have to end up selling at even lower prices if they miss selling now. Undecided traders make prices decrease faster by creating a sense of urgency among the sellers. They rush to sell and push the prices lower.
The goal of a successful day trader is to figure out if the sellers will end up in control or if the buyers will end up in control, and then make a calculated bet, at the appropriate time, quickly and tactically on the winning group. This is the practical application of guerrilla warfare. Your job is to analyze the balance of power between buyers and sellers and bet on the winning group. Fortunately, candlestick charts reflect this fight and mass psychology in action. A successful day trader is a social psychologist behind a computer and charting software. Trading is the study of mass psychology.
Candlesticks will tell you a great deal about the general trend of a stock and the power of buyers or sellers in the market. Candles are always born neutral. After birth, they can grow to become either bearish, bullish or, on rare occasions, neither. When a candle is born, traders do not know what it will become. They may speculate but they do not truly know what a candle is until it dies (closes). After a candle is born, the battle begins. The bulls and the bears fight it out, and the candle displays who is winning. If buyers are in control, you will see the candle move up and form a bullish candle. If sellers are in control of the price, you will see the candle move down and become a bearish candle. You may be thinking that this is all very obvious, but many traders don’t see candles as a fight between buyers and sellers. That little candle is an excellent indicator that tells you who is currently winning the battle, the bulls (buyers) or the bears (sellers).